Good day, ladies and gentlemen, and welcome to the Universal Electronics First Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Becky Herrick with LHA. Please go ahead. .

Thank you, Jonathan. Thank you, all, for joining us for the Universal Electronics first quarter 2014 conference call. By now, you should have received a copy of the press release and if you have not, please contact LHA at (415) 433-3777..

This call is being broadcast live over the Internet. A webcast replay will be available for 1 year at www.uei.com. Also any additional updated material non-public information that might be discussed during this call will be provided on the company’s website where it will be retained for at least 1 year.

You may also access that information by listening to the webcast replay. After reading a short Safe Harbor statement, I will turn the call over to management..

During the course of this conference call, management may make projections or other forward-looking statements regarding future events and the future financial performance of the company, including the benefits anticipated by the company due to the continued strength across its entire business, the continued innovation of products and advanced technologies, such as the company’s QuickSet and Control Plus technologies, that will attract new customers in existing and new markets; the continued expansion of the company's technologies into smart devices, such as smartphones, tablets, smart TVs, IPTV devices, game consoles and over-the-top services, including the benefits anticipated by management due to Samsung selecting the company to embed our technology into the Samsung WatchON application found in Samsung’s Galaxy S5 smartphone, and the Gear 2 and Gear 2 Neo; and due to Microsoft selecting the company to embed our technology into the Microsoft Xbox One console; the successes anticipated by management from the growth expected in consumer electronics, particularly in the Wearables segment; and other risk factors described in the company's filings with the U.S.

Securities and Exchange Commission..

The actual results the company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release. .

Management wishes to caution you that these statements are just projections and actual results or events may differ materially and the company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today's date.

For further detail on risks, management refers you to the press release mentioned at the onset of this call and the documents the company files from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2013.

These documents contain and identify various factors that could cause actual results to differ materially from those contained in management's projections or forward-looking statements. .

Also the company references adjusted pro forma or non-GAAP metrics in this call. These adjusted pro forma metrics are provided because management uses them in making financial, operating and planning decisions and in evaluating the company's performance.

The company believes these measures will assist investors in assessing the company's underlying performance for the periods being reported.

Adjusted pro forma metrics exclude amortization expense relating to intangible assets acquired, depreciation expenses relating to the increase in fixed assets from cost to fair market value, other employee-related restructuring costs and stock-based compensation. .

As a reminder, the results for the prior year period have been adjusted to reflect the exclusion of stock-based compensation expense.

The management financial remarks that will reference adjusted pro forma metrics, a full reconciliation of these adjusted pro forma measures versus GAAP is included in the company's press release that was issued after the close of market today. .

On the call today are Chairman and Chief Executive Officer, Paul Arling, who will deliver an overview; and Chief Financial Officer, Bryan Hackworth, who will summarize the financials; and then Paul will return to provide closing remarks. It’s now my pleasure to introduce Paul Arling. Please go ahead, Paul. .

Thank you, Becky. Our first quarter results demonstrate our continued strong performance across the entire business. Compared to the first quarter of last year, we reported 13% revenue growth and an operating income increase of 38%. We have clearly established a strong start to 2014.

Our sales to consumer electronics customers reflected robust demand for TVs utilizing our traditional and advanced control technologies, as well as the continued rollout of Smart TVs embedded with our software. We have further expanded our leadership position in smart device control technology through licensing our innovations into new applications. .

For example, during the first quarter, we continued our successful relationship with Microsoft for its Xbox One gaming console, which began shipping in late in 2013.

As an increasing number of companies seek to integrate their devices into the home entertainment environment, UEI's technologies are a natural fit, as we provide all of the plumbing to control all devices within the connected home. .

UEI QuickSet is our embedded software technology that enables an AV device remote to be set up and programmed to control virtually any television or entertainment device in the home, with minimal or no user input.

QuickSet is currently deployed in over 70 million devices around the world, including set-top boxes, smartphones, smart TVs and game consoles, just to name a few. And it is available on a variety of platforms and operating systems. .

mode confusion and input switching. We are working with a major player in the home entertainment space to roll out Control Plus as part of a significant software release later this year. We look forward to updating you in the near future. .

We continue working with some of the world's largest mobile companies on their new smart device products. As we announced yesterday, another example of this is Samsung, and it's recently released Samsung -- or Galaxy S5 smartphone. .

Through the licensing of our control technology and IP, UEI is powering Samsung's WatchON app, which is part of the Galaxy essentials on the S5 phone. Samsung has also recently begun shipping 2 new smart watches, the Gear 2 and Gear 2 Neo.

UEI's embedded app technology is pre-installed into these devices, powering the WatchON app that enables the watch to communicate within the connected home. .

This concept of wearable technology could represent a significant opportunity for us. According to Next Market Insights, the smartwatch market is expected to grow at a compound annual growth rate of over 70% over the next 6 years. .

From 15 million units in 2014 to nearly 400 million units by 2020. Just like other devices in the smart device channel, the technologies UEI specializes in provide the functionality to power these smartwatches to control devices within the home entertainment stack. .

These recent wins, just like the many wins before them, further prove that UEI is redefining what a remote control is, and what a remote control can do. We are creating new ways that smartphones, tablets, game consoles, TVs and yes, even traditional remote controls can make the home entertainment experience easier for consumers. .

With that, I'd like to now turn the call over to our CFO, Bryan Hackworth, to discuss our financial results. .

Thank you, Paul. As a reminder, our results for the first quarter of 2014, as well as the same period in 2013, will reference adjusted pro forma metrics. First quarter 2014 net sales were $129.8 million, up 13% compared to $114.7 million for the first quarter of 2013.

Business category net sales were $118.4 million, up 13%, compared to the first quarter of 2013 net sales of $104.6 million. .

Our consumer category net sales were $11.4 million, up 13%, compared to the first quarter of 2013 net sales of $10.1 million.

Gross profit for the first quarter was $36.8 million or 28.3% of sales, compared to a gross margin of 28.6% in the first quarter of 2013, while operating expenses were $28 million or 21.6% of sales, compared to $26.5 million or 23.1% of sales in the first quarter of 2013. .

Breaking down our operating expenses. R&D expense was $4.3 million, compared to $4.2 million in the first quarter of 2013. SG&A expenses were $23.7 million, compared to $22.3 million in the first quarter of 2013. Operating income was $8.8 million, an increase of 38%, when compared to $6.4 million in the first quarter of 2013. .

Effective tax rate was 24.1%, compared to 16.8% in the first quarter of 2013. First quarter of 2014 net income was $6.4 million or $0.40 per diluted share, compared to $4.8 million or $0.32 per diluted share in the first quarter of 2013. .

Next I'll review [ph] our cash flow and balance sheet at March 31, 2014. We've generated a significant amount of cash during the past 12 months, as our cash balance has increased to $90.4 million at March 31, 2014, compared to $28.7 million a year prior. .

We continue to evaluate the potential uses of our cash, including internal investments, as well as mergers and acquisitions. However, at this time, we believe repurchasing our shares is the best alternative given our bright future and our recent trading price. As a result, our Board of Directors has authorized us to purchase up to 1 million shares.

Purchases may be made in open market transactions, block transactions, on or off an exchange or in privately negotiated transactions. .

DSOs were approximately 59 days at March 31, 2014, compared to 69 days the year prior. Net inventory turns were approximately 4 turns at March 31, 2014, compared to 3.7 turns the year prior. .

Now turning to our guidance. For the second quarter of 2014, we expect revenue between $141 million and $149 million, compared to last year's second quarter revenue of $136.1 million. EPS for the second quarter is expected to range from $0.56 to $0.66 per diluted share, compared to $0.53 recorded for the second quarter of 2013. .

I'd now like to turn the call back to Paul. .

Thanks, Bryan. We are at a dynamic stage in our industry right now. The explosion of content and the myriad ways that consumers are going to be able to discover and enjoy the content are creating the need for greater simplicity.

This has become a priority for device manufacturers, content providers and mobile platforms, and creates an enormous opportunity for us. UEI has established a proven track record of successful innovation, by proactively developing and patenting technology that incorporates ease of use in advanced functionality. .

Our position in the industry continues to be stronger than ever, and we are confident that UEI will be at the forefront of providing the control solutions that address consumers' desires to make their home entertainment environment easier to access and control. Stay tuned. .

I'd now like to open it up for questions.

Jonathan?.

[Operator Instructions] Our first question comes from the line of Jason Ursaner from CJS Securities. .

Can you maybe talk a little more about the contribution from mobile in the quarter, and is there a range that maybe you can bracket the incremental contribution of the Xbox program in Q1 versus Q4?.

Yes. We don't disclose, specifically, those numbers. I will say in Q1, the contribution was less than in Q4, on the Xbox. .

Okay. I guess, I'm not really trying to get any customer-specific sensitive information but -- because you mentioned the product launch late in the quarter.

So I guess, I'm trying to understand, the rough numbers for the size of that program could be expected to build to and maybe what it's contributing to guidance for Q2? And I guess, more importantly, obviously with the Samsung announcing yesterday, mobile's positioned to become a much more meaningful portion of your earnings, and this is really the first program that would be a frame of reference for how to model that going forward.

.

Jason, in terms of smart devices, first of all, on the Xbox side, I think I have said early -- late in the year 2013, so it was, it started earlier than just late in Q4, number one, just as a clarification.

In terms of guidance on any of these platforms, the only thing I would ask you to do is look for the publicly available information from those customers because we certainly can't provide any individual customer's data, either on licensing agreements or units for certain.

But I will say this, that if you were to look back over the last couple of years, the contribution from all these "smart devices:" game consoles, televisions, mobile platforms, including smartphones and tablets, and now, beginning this year, smartwatches. The contribution has grown significantly.

We may, at some later point, talk specifically about that as a group. But we want to be again careful of sensitive information of our customers, which we never talk about.

But it's fair to say that these smart devices, these connected devices, over the last 3 years have actually increased pretty significantly as part of the contribution to our sales and gross margin dollars, and of course, earnings. .

Okay.

And I guess, if we take our own assumptions on either dollar content and then the number of units in terms of volume, how should we think about the incremental flow-through on gross margin? What -- obviously, you are doing a lot of the activities to create this product for your core business, maybe you could just talk about the added cost, and how should we think about gross margin expansion and ultimately operating margin expansion, from whatever our assumption on dollar revenue?.

Yes. When you deal with licensing, Jason, it's obviously going to improve the gross margin. Even on chips, because sometimes we embed our technology, we'll either license it or we'll embed our technology on a chip, which also typically yields slightly higher gross margins in, say, a standard remote.

But the one thing that we've done, as well as we've grown our core business, and we're selling more to large customers, which is a good thing. Now when you're dealing with large customers, they yield -- they typically get some purchasing power and the gross margins on a sale to a large customer will typically be less than, say, our company average.

But the good thing is, it still contributes to our bottom line. So if you looked at Q1, the perfect example, where we grew sales by 13%, yet operating income grew by 38%. So sometimes, you get some gives and takes on the gross margin rate. But the bottom line is we're -- they're both contributing to, and improving in the operating income line. .

Got it. I guess, I was more in -- I mean I would have assumed if it's a pure license agreement, I would think that gross margin profile is pretty dramatically different, I guess, is what I'm trying to get at. I mean I would think there's, fairly little cost, simply more of a software-type sale.

Is that not the right way?.

Yes. That's true, if you are talking about a pure license, that's absolutely correct. That there's very little associated, variable cost with the license. That's true.

But we're still in the beginning phases of the whole -- because the smart device channel is still early -- still early stages, but you're right, if you're looking at it independently, there is very little variable costs associated with the license revenue. .

Okay, understood. And then just last question on the cash balance. Obviously, it's growing pretty substantially, which is certainly not a problem.

But maybe just some thoughts on capital structure, what do you plan to do with the cash over time?.

Well, we just disclosed in the prepared remarks that we're planning on buying back, contingent on price, but -- buying back up to 1 million shares of our stock and our board has recently approved that. So we believe in the company.

We believe we have a bright future, given our strong cash flow over the last 12 months, and the recent stock price, we believe the best investment right now is in our own stock. .

Our next question comes from the line of Steven Frankel from Dougherty. .

Bryan, just first a clarification.

What's the amount of stock comp that factored into the Q2 guidance, is it the same?.

Yes, it's about the same, Steve. It's about $4.5 million to $5 million for a given year, so it's -- just divide that by 4. I think, it was $1.3 million to be exact. I think, for the quarter. .

And in terms of gross margin, normally we think of these new smart devices and the software content raising gross margin, but gross margin was down a little bit year-on-year, what else went on in the quarter that was countervailing to that?.

I just spoke about, we had the growth was primarily related to large customers, sales to large customers, and they yield pricing power. So we ended up selling more. So it puts pressure, downward pressure on the gross margin rate. But we care more about the operating income than we do the gross margin, we care about both.

But if you've got a customer that we're going sell more to that, say, that the average gross margin is lower than our company average, but the associated variable costs is low, then it's going to put upward pressure on the operating margin line, which it has. And you look at Q1, perfect example, 13% net sales growth, 38% operating margin growth.

So I think it's -- they're both positive. .

Okay. And then just to make sure I heard Paul correctly.

Is the WatchON app that's got your technology in it shipping now with the S5, globally or in major geographies at this point?.

It is. Yes, the WatchON app on the Gear 2 and the Gear 2 Neo. Right. So I would encourage you all to go out and get your S5 phone and your Gear 2 or Gear 2 Neo and utilize our technology on those smartwatches. .

[Operator Instructions] Our next question is a follow-up question from the line of Jason Ursaner from CJS Securities. .

[Audio Gap].

On the S5, so the WatchON app, which is one of the essential apps, it's not the preloaded one? So is the smart remote app using a different database for setting up consumer TVs and/or a different underlying control methodology? And should we assume your royalty at the -- at least at the onset is based on shipments or downloads?.

There are 2 apps on the phone. We are embedded, Samsung has developed its own app, which has been branded WatchON. We have integrated our control technologies and IP into that WatchON app. It's included as a free download or is part of the Galaxy essentials on the S5. It is pre-installed on the Gear 2 and Gear 2 Neo. .

Okay.

And the smart remote, I guess, excluding the functionality part, but in terms of the database that it's going to use for setting up on TVs, would that also use an underlying database that's yours?.

No, that is not our app. .

Our next question comes from the line of Edison Chu from G2 Investments. .

This is Josh Goldberg for Edison.

I guess, I'll start by saying obviously, positive about your stock repurchase, did you buy back any stock in the first quarter?.

No. Nothing significant. .

Okay.

Is there a reason why, I mean if you have the share buy back in place?.

We have a share buy back in place, as of our board meeting, which was recently, in the last couple of weeks. .

Okay, got you. And then, I guess, kind of coming back to last person's question, it sounds like you are pre-installed in some of the Samsung products but not the actual Galaxy 5, where they have a different technology. Obviously, it's a key customer of yours.

Is there any thought of, maybe, the company that's working with them now, you're talking about either having some sort of license with them, suing them for the patents that you control, I mean it would seem like, they're kind of flying under the radar here for that app. And I have a follow-up. .

Yes. Well, we are pre-installed on the watches. We are in certain regions of the world, the WatchON app may be pre-installed as well. This region in the U.S., it is not, it's part of the Galaxy essentials, which is a download.

There is another app on the phone, as we publicly disclosed we're in the midst of a litigation with a company that is powering some of these apps, including what we understand is the app, the other app on this Galaxy S5. So we are currently in litigation with the company in this market space. .

And then, just in terms of your traditional business, could you talk about any 10% customers in the quarter? And how do you think the business segment fared this quarter with some of the mergers and acquisitions in the space?.

Yes, we had one 10% customer. It was DIRECTV that came out at 11.3%. In terms of how the business channel fared, it's fared very well, I didn't see really any adverse effect at all from any mergers or acquisitions recently that the -- [indiscernible] broadcast continues to grow as well as the OEM channels.

So we've done well in the -- and at any recent M&A activity, we have seen no adverse effect. .

Got you. And the gross margin's down to 23%, was that just a function of mix or... .

No, no, it was 28.3%, it wasn't 23%. Yes, it was mix, it was just more sales to large customers offset some of the incremental licensing revenue, because the license revenue has grown.

So I don't want people to think that it hasn't, it's just sometimes, it gets offset by factors, such as selling more to large customers, which isn't again a bad thing when incrementally it improves your bottom line. .

When you look at your second quarter guidance, I assume the majority of that growth is still coming from your business and consumer and not the licensing part of the business, is that fair to say?.

Yes. .

Okay. And just previously, the last couple of years, your second quarter is up anywhere from 12% to 15% to 19%.

What -- is there some level of conservatism here in the June quarter that you're only guiding it at the midpoint 12%, and more like 10% to 14% in the ranges I mean, it seems a little bit conservative, you have some license deals and obviously in general you have a strong June quarter?.

Yes. I mean, all I can say with that is that, maybe I'm guilty of being conservative sometimes but right now, I think, this is where we're going to land. And we said, in the long-term respect, we think we're going to grow between 10% and 15%.

Bottom line is 5% to 10%, so we're actually, for the next quarter we're seeing the top line more like in the 10% to 15%. So I'm just -- based on the information I have right now, it's where I think we're going to wind up. .

Our next question comes from the line of George Prince from RBC. .

Can you -- a broad question here, Paul.

Can you talk about the opportunities internationally for any of the products?.

What do you mean -- well, sure for the core products or... .

Sure, you take your pick.

What seems to be exciting, what seems to be growing, what are the opportunities going forward?.

Well, I guess, this is good news. I mean, we've seen pretty broad based growth. I mean, we've done well in -- across our different types of products, core products, as Bryan was just talking about the mix, we've seen pretty good growth in core product sales, as well as the smart device license area, which where we have new wins.

Also regionally, we've seen pretty good strength. So I wouldn't call out any one thing that was responsible for the 13% growth and 38% operating income growth.

We had a lot of really positive things going on in our business that have caused a broad based growth, and it's been through the hard work of the people here, both in the engineering group and the commercial group sales and marketing to produce these results. .

Is there any particular region that looks exciting in the next couple of years for any of the products?.

Yes, well, I mean look we've done really well here in the U.S. In Q1 we did, we did last year as well. I think that may surprise people because everyone sort of these that [ph] -- says that all the growth is outside the U.S., we've done very well here.

Of course, as expected, we've seen a lot of real positive results in Asia, as you know, the most -- many consumer electronics brands and many of the mobile brands, their home is in Asia, which is part of our Asia sales group.

So they've performed extremely well over there, on both the core products for today, as well as these design wins and embedded technologies and embedded software for the products of tomorrow. So I think that's probably where we're seeing a lot of good long-term growth, is from those embedded wins. .

[Operator Instructions] Our next question is a follow-up from the line of Jason Ursaner from CJS Securities. .

Just, Bryan, you got asked before, on the Q2 outlook on the licensing.

You said it's not expected to be a big contributor as part of the revenue growth or revenue and you adjust [ph] the earnings growth?.

Yes. Revenue growth. It still plays a factor. I mean, it's just that if you take our total sales for the year, what's expected for the year or even for the first half of the year, I should say, it's still not making a, from a percentage basis, significant on the top line, but it contributes to the bottom line.

Because it's potent, right, as we talked about earlier. You're talking about little variable cost associated with it, and if it's a license deal, it's 100% margin. .

Right. And then just, last question on the WatchON, has there been any public statistics on the percent of users who download the essential app package? I would imagine it's fairly high, but not sure if there has been anything written on it. .

Yes, there hasn't yet, Jason, unfortunately. But I mean obviously, you know the phone just launched in the last couple of weeks, the S5, so don't really have an early indication on that. As I said earlier, the app is free.

It's actually bundled as a group of apps in which the user can -- essentially they're, as the name implies, they're -- Samsung markets them as apps that are essential to get the most out of your Galaxy phone and then there's a download-all button, the apps are free for the user.

So you presume that, that would mean that there'd be a fair amount of people who would hit that download all and realize they're free and download them. So yes, we don't have any early take, though, on the number of downloads. And remember, again, there are regions where it is pre-installed, so that will be irrelevant.

And of course on the watches it's a pre-installed app. .

[Operator Instructions] Our next question comes from the line of Ian Corydon from B. Riley and Co. .

I apologize, if this has been asked already but can we assume that the license is about the same, whether you're pre-installed on S5 or whether you are downloaded in the essentials?.

Yes. You can presume that. .

Okay.

And is there a significant difference between the license on the phone versus the smartwatches?.

No. .

This does conclude the question-and-answer session of today's program. I'd like to turn the program back to Paul for closing. .

Okay thank you, Jonathan. And thanks, everyone, for joining us today and for your continued support of UEI. I just wanted to let you know that we'll be participating in the B. Riley & Co. 15th Annual Investor Conference on May 21, in Santa Monica. We hope to see you there. Thanks for joining and goodbye. .

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..